management’s - amazon simple storage service · management’s discussion and analysis ......

FOR THE SECOND QUARTER ENDING

JUNE 30, 2017

MANAGEMENT’S

DISCUSSION &

ANALYSIS

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ADVISORIES

Management’s discussion and analysis (“MD&A”) is Ikkuma Resources Corp.’s (“Ikkuma” or the “Corporation”) explanation of its financial performance for the period covered by the financial statements along with an analysis of the Corporation’s financial position. Comments relate to and should be read in conjunction with the audited financial statements of the Corporation for the year ended December 31, 2016 and the unaudited condensed interim financial statements as at and for the three and six months ended June 30, 2017 and 2016. This MD&A is dated August 23, 2017 and based on information available to that date. All figures provided herein and in the June 30, 2017 unaudited condensed interim financial statements are reported in Canadian dollars.

FORWARD-LOOKING STATEMENTS

Ikkuma is a Canadian-based corporation whose common shares are traded on the TSX Venture Exchange (“TSX-V”) under the symbol

“IKM”. This MD&A contains forward-looking statements. . The use of any of the words “expect”, “anticipate”, “continue”, “estimate”,

“objective”, “ongoing”, “may”, “will”, “project”, “should”, “believe”, “plans”, “intends” and similar expressions are intended to identify

forward-looking statements or information. Management’s assessment of future plans and operations, drilling plans, and the timing

thereof, plans for the tie-in and completion of wells and the timing thereof, capital expenditures, timing of capital expenditures, and

methods of financing capital expenditures and the ability to fund financial liabilities, production estimates, expected commodity mix

and prices, future operating costs, future transportation costs, expected royalty rates, general and administrative expenses, interest

rates, debt levels, funds from operations and the timing of and impact of implementing accounting policies, estimates regarding

undeveloped land position and estimated future drilling, recompletion, or reactivation locations and anticipated impact on the

Corporation’s forecasts in respect of capital expenditures may constitute forward-looking statements under applicable securities laws

and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation,

production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve

estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect

assessment of the value of acquisitions, failure to realize the anticipated benefit of acquisitions, the inability to fully realize the benefits

of acquisitions, delays resulting from or inability to obtain required regulatory approvals and inability to access sufficient capital from

internal and external sources. As a consequence, the Corporation’s actual results may differ materially from those expressed in, or

implied by, the forward-looking statements. Forward-looking statements or information is based on a number of factors and

assumptions which have been used to develop such statements and information but which may prove to be incorrect. Although the

Corporation believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance

should not be placed on forward-looking statements and information but which may prove to be incorrect. Although the Corporation

believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not

be placed on forward-looking statements because the Corporation can give no assurance that such expectations will prove to be correct.

In addition to other factors and assumptions which may be identified in this document and other documents filed by the Corporation,

assumptions have been made regarding, among other things: the impact of increasing competition; the general stability of the

economic and political environment in which the Corporation operates; the ability of the Corporation to obtain qualified staff,

equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which the

Corporation has an interest in to operate the field in a safe, efficient and effective manner; the Corporation’s ability to obtain financing

on acceptable terms; changes in the Corporation’s banking facility; field production rates and decline rates; the ability to reduce

operating costs; the ability to replace and expand oil and natural gas reserves through acquisition, development or exploration; the

timing and costs of pipeline, storage and facility construction and expansion; the ability of the Corporation to secure adequate product

transportation; future petroleum and natural gas prices; currency exchange and interest rates; the regulatory framework regarding

royalties, taxes, and environmental matters in the jurisdictions in which the Corporation operates; and the Corporation’s ability to

successfully market its petroleum and natural gas products. Readers are cautioned that the foregoing list of factors is not exhaustive.

Additional information on these and other factors that could affect the Corporation’s operations and financial results are included in

reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com) or

at the Corporation’s website (www.Ikkumarescorp.com). Furthermore, the forward-looking statements contained in this document are

made as at the date of this document and the Corporation does not undertake any obligation to update publicly or to revise any of the

included forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required

by applicable securities laws.

http://www.sedar.com/

http://www.ikkumarescorp.com/

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CONVERSIONS

The oil and gas industry commonly expresses production volumes and reserves on a “barrel of oil equivalent” basis (“boe”) whereby

natural gas volumes are converted at the ratio of six thousand cubic feet to one barrel of oil. The intention is to sum oil and natural gas

measurement units into one basis for improved analysis of results and comparisons with other industry participants.

Throughout this MD&A the Corporation has used the 6:1 boe measure which is the approximate energy equivalency of the two

commodities during combustion. Boe does not represent a value equivalency at the wellhead nor at the plant gate which is where the

Corporation sells its production volumes, and therefore, may be a misleading measure, particularly if used in isolation. Given that the

value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of

6:1, utilizing a 6:1 conversion may be misleading as an indication of value.

NON-IFRS MEASURES

FUNDS FROM OPERATIONS

One of the benchmarks Ikkuma uses to evaluate its performance is funds from operations. Funds from operations is a measure not defined in IFRS but is commonly used in the oil and gas industry. It represents cash provided by operating activities before changes in operating non-cash working capital and decommissioning obligation expenditures. The Corporation considers it a key measure as it demonstrates the ability of the Corporation’s continuing operations to generate the funds flow necessary to fund future growth through capital investment. Funds from operations should not be considered an alternative to or more meaningful than cash provided by operating activities as determined in accordance with IFRS as an indicator of the Corporation’s performance. Ikkuma’s determination of funds from operations may not be comparable with other companies. Ikkuma also presents funds from operations per share whereby per share amounts are calculated using the weighted average shares outstanding consistent with the calculation of income (loss) per share. The following table reconciles Ikkuma’s cash provided by operating activities to funds from operations:

(thousands of dollars) Three months ended Six months ended

June 30 June 30 June 30 June 30 2017 2016 2017 2016

Cash provided by operating activities $ 2,204 $ 2,709 $ 5,474 $ 4,921

Decommissioning obligation expenditures 19 112 118 152

Changes in operating non-cash working capital (159) (424) (700) (482)

Funds from operations $ 2,064 $ 2,397 $ 4,892 $ 4,591

OPERATING NETBACK

Management uses certain industry benchmarks such as operating netback to analyze financial and operating performance. This benchmark as presented does not have any standardized meaning prescribed by IFRS and therefore may not be comparable with the calculation of similar measures for other entities. Operating netback equals total petroleum and natural gas sales, realized gains and losses on commodity contracts, less royalties, operating costs and transportation costs calculated on a boe basis. Management considers operating netback an important measure to evaluate its operational performance as it demonstrates its field level profitability relative to current commodity prices. The calculation of Ikkuma’s netbacks can be seen below in the Operating Netbacks section.

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RESULTS OF OPERATIONS

PRODUCTION

Three months ended Six months ended


Natural gas (mcf/d) 34,259 35,361 36,243 39,790

Light oil (bbls/d) 27 - 53 -

NGL (bbls/d) 125 27 121 77

Total boepd 5,861 5,921 6,214 6,709

% Natural gas 97 99 97 99

Ikkuma’s natural gas production for the three months and six months ended June 30, 2017 is lower than the comparable periods by 2% and 9%, respectively. The lower natural gas volumes in 2017 are due to natural decline as Ikkuma’s capital program has been focused on its Cardium oil play. Natural gas volumes in the second quarter of 2017 and 2016 also reflect downtime for scheduled maintenance.

The Corporation’s two Cardium oil wells experienced limited run time in the second quarter of 2017 due to spring break up and well workovers.

REVENUE

(thousands of dollars, except prices) Three months ended Six months ended

June 30 June 30 June 30 June 30

2017 2016 2017 2016

Revenue

Natural gas $ 8,805

$ 4,402 $ 18,183 $ 11,832

Light oil 136 - 567 -

NGLs 343 109 768 336

Sulphur 78 65 139 304

Total $ 9,362 $ 4,576 $ 19,657 $ 12,472

Realized Prices

Natural gas ($/mcf) $ 2.82 $ 1.37 $ 2.77 $ 1.63

Light oil ($/bbl) 56.26 - 59.17 -

NGLs ($/bbl) 30.21 44.12 35.09 23.95

Average price per boe $ 17.55 $ 8.49 $ 17.48 $ 10.21

Benchmark Pricing

Edmonton Par (Cdn $/bbl) $ 61.56 $ 54.35 $ 62.61 $ 47.67

Natural gas – AECO (5A) daily index (Cdn $/mcf) $ 2.77 $ 1.37 $ 2.73 $ 1.61

Ikkuma’s revenue of $9.4 million for the three months ended June 30, 2017 is 105% higher than the $4.6 million reported in the prior period. Similarly, revenue for the six months ended June 30, 2017 increased 58% to $19.7 million from $12.5 million for the same period in the prior year. These increases are due to the significant increase in realized natural gas prices, slightly offset by lower production period over period.

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Ikkuma’s realized natural gas price for the three and six months ended June 30, 2017 increased 102% and 70% over the same periods of 2016, respectively, consistent with the strengthening of AECO, the Corporation’s benchmark pricing. Ikkuma’s realized gas prices are normally at or slightly higher than AECO due to heat content adjustments. The Corporation’s realized gas price for the three and six months ended June 30, 2017 was 102% and 101% of AECO respectively, which is comparable to the 100% and 101% of AECO reported in the same periods of 2016.

Ikkuma’s realized oil price for the three and six months ending June 30, 2017 was 91% and 95% of the Edmonton Par reference price, respectively. The high quality crude produced by the Corporation attracted an average premium of $0.74/bbl to the Edmonton Par price, which was then adjusted for pipeline fees and tariffs.

RISK MANAGEMENT COMMODITY CONTRACTS

The Corporation enters into risk management commodity contracts in order to reduce volatility in financial results and protect the Corporation’s financial position. Ikkuma’s strategy focuses on the use of costless collars and swaps to limit exposure to fluctuations in commodity prices while allowing for participation in commodity price increases. The Corporation’s financial risk management activities are conducted pursuant to the Corporation’s Risk Management Policy approved by the board of directors. These contracts had the following impact on the statements of income (loss) and comprehensive income (loss):

(thousands of dollars, except per boe) Three months ended Six months ended


Realized gain on financial instruments $ 192 $ 4,392 $ 274 $ 7,478

Per boe $ 0.36 $ 8.19 $ 0.24 $ 6.12

Unrealized gain (loss) on financial instruments $ 1,649 $ (10,832) $ 8,041 $ (4,306)

At June 30, 2017 the Corporation held the following risk management commodity contracts:

Natural Gas (AECO $Cdn)

Remaining Term Option Traded Volume (GJ/d) Strike Price Fair Value ($000)

July 1, 2017 - December 31, 2017 Swap - sell 10,000 $2.84 $ 835


July 1, 2017 - December 31, 2017 Swap - buy 7,000 $3.00 $ (836)



July 1, 2017 - December 31, 2017 Swap – sell 2,500 $2.70 $ 137


January 1, 2018 - December 31, 2018 Swap - sell 5,500 $2.72 $ 572

January 1, 2018 - December 31, 2018 Swap - Sell(1) 2,500 $2.80 $ 200

January 1, 2019 - December 31, 2019 Call 7,000 $3.00 $ (295)


Total $ 2,183

(1) This contract has a European option whereby if the price on settlement each month exceeds $2.80/GJ the contract

double to 5,000 GJ @ $2.80.

Ikkuma’s average price on 26 mmcf/d of risk management contracts for the remainder of 2017 is approximately $2.86/mcf.

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ROYALTIES



Royalties $ 6 $ (390) $ 342 $ 291

Per boe $ 0.01 $ (0.73) $ 0.30 $ 0.24

Percentage of revenue (“Royalty Rate”) 0% (9%) 2% 2%

Ikkuma’s royalty rate for the three months and six months ended June 30, 2017 and the comparative periods for 2016 are lower than the expected royalty rate of 8% due to Gas Cost Allowance “GCA” credit adjustments. The Corporation recorded $0.7 million of GCA credits in the second quarter of 2017 and $0.8 million of GCA credits in the same period of 2016. Ikkuma recorded $1.3 million of GCA credits in the six months ended June 30th, 2017 and $0.8 million of GCA credits in the same period of 2016. Excluding the GCA credits, Ikkuma’s royalty rates for the three and six months ended June 30, 2017 would have been comparable at 8%.

OPERATING EXPENSES



Operating expenses $ 4,460 $ 4,573 $ 9,240 $ 10,033

Per boe $ 8.36 $ 8.49 $ 8.22 $ 8.22

Per unit operating costs for the three and six months ended June 30, 2017 are comparable to the same periods in 2016.

TRANSPORTATION EXPENSES



Gas transportation $ 1,064 $ 953 $ 2,199 $ 2,202

Oil transportation 21 - 66 -

Total transportation expenses $ 1,085 $ 953 $ 2,265 $ 2,202

Per boe $ 2.03 $ 1.77 $ 2.01 $ 1.80

Transportation expenses per boe for the three and six months ended June 30, 2017 increased 15% and 12% respectively compared to the same periods in 2016. This increase is due to the addition of oil transportation expenses arising from the Cardium oil play and gas firm service obligations exceeding production during periods of third party restrictions.

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OPERATING NETBACKS

(dollars per boe) Three months ended Six months ended


Revenue $ 17.55 $ 8.49 $ 17.48 $ 10.21

Realized gain on commodity contracts 0.36 8.19 0.24 6.12

Royalties (0.01) 0.73 (0.30) (0.24)

Operating costs (8.36) (8.49) (8.22) (8.22)

Transportation costs (2.03) (1.77) (2.01) (1.80)

Operating netbacks $ 7.51 $ 7.15 $ 7.19 $ 6.07

The increased operating netback for the three and six months ended June 30, 2017 as compared to the same periods in 2016 is due primarily to the improved natural gas prices.

GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES


June 30 June 30 June 30 June 30

2017 2016 2017 2016

Gross costs $ 1,793 $ 1,399 $ 3,256 $ 2,796

Operator’s recoveries (97) (256) (211) (541)

Capitalized costs (345) (39) (729) (107)

G&A expenses $ 1,351 $ 1,104 $ 2,316 $ 2,148

Per boe $ 2.53 $ 2.05 $ 2.06 $ 1.76

G&A, net of recoveries and capitalized costs, for the three and six months ended June 30, 2017 are 22% and 8% higher than the comparable periods of 2016, respectively. Per unit G&A costs for the three and six months ended June 30, 2017 increased by 23% and 17% compared to the three and six months ended June 30, 2016. The increases are due to $0.2 million of costs associated with personnel changes recorded in the second quarter of 2017. In addition 7% lower production volumes for the six months ended June 30, 2017 as compared to the prior period contributed to higher per unit costs.

SHARE-BASED COMPENSATION



Gross costs $ 83 $ 53 $ 104 $ 103


Total share-based compensation $ 62 $ 42 $ 78 $ 81

At June 30, 2017, the Corporation had 6,940,100 options outstanding with a weighted average exercise price of $0.90. During the three months ended June 30, 2017, the Corporation granted 6,159,500 stock options at an exercise price of $0.86. As a result, share-based compensation for the three months ended June 30, 2017 increased by 48% compared to the three months ended June 30, 2016.

Stock options granted have a five year term to expiry and a three year vesting period from the date of grant.

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DEPLETION AND DEPRECIATION



Depletion and depreciation expense $ 4,480 $ 4,171 $ 9,278 $ 9,318

Per boe $ 8.40 $ 7.74 $ 8.25 $ 7.63

Per unit depletion and depreciation expenses for the three months and six months ended June 30, 2017 are 9% and 8% higher than the comparable periods of 2016. This reflects the impact of conservative initial reserve addition bookings in the fourth quarter of 2016 for the emerging Cardium oil play.

IMPAIRMENT

There were no impairment charges or recoveries recorded for the three months or six months ended June 30, 2017 as no indicators of impairment were identified. Commodity prices remain volatile, and accordingly, impairment charges or recoveries could be recorded in future periods.

FINANCE EXPENSES

(thousands of dollars) Three months ended June 30, Six months ended June 30, 2017 2016 2017 2016

Interest and fees on bank debt $ 266 $ 331 $ 554 $ 685

Interest expense on Term loan 322 - 322 -

Accretion of deferred financing costs 144 - 144 -

Accretion on decommissioning obligations 224 220 445 421

Total finance expenses $ 956 $ 551 $ 1,465 $ 1,106

Average drawings on Bank loan $ 18,938 $ 25,750 $ 23,009 $ 24,389

Average drawings on Term loan $ 18,387 $ - $ 9,194 $ -

Average long-term debt level $ 37,325 $ 25,750 $ 32,203 $ 24,389

Effective interest rate on Bank loan 4.22% 4.24% 4.10% 4.70%

Effective interest rate on Term loan 7.02% - 7.06% -

Interest and fees on long-term debt per boe $ 1.10 $ 0.61 $ 0.78 $ 0.56

On May 25th, 2017, Ikkuma entered into a $45 million second lien senior secured term loan facility (the “Term loan”) that is repayable March 31, 2022 and bears interest at 7.25% per annum. Accordingly, interest expense on the Term loan for the three and six months ended June 30, 2017 was $0.3 million. The Term loan was used to repay outstanding bank indebtedness reducing the average drawings on bank loan for the three months and six months ended June 30, 2017 and accordingly lowered interest expense.

Accretion on decommissioning obligations for the three and six months ending June 30, 2017 of $0.2 million and $0.4 million were comparable to the same periods of 2016.

Accretion on deferred financing costs are comprised of debt issue costs of $0.6 million and the fair value of the warrants issued to AIMCo of $1.6 million and are being amortized over the life of the loan.

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DEFERRED INCOME TAX

The Corporation’s oil and natural gas reserves generate sufficient future cash flows to make it probable that future taxable profits will be available for which the Corporation can utilize the benefit of tax deductions. Accordingly, the Corporation has recognized a deferred income tax asset of $15.8 million relating to deductible temporary differences.

Ikkuma has tax pools of approximately $210 million including $57 million of non-capital loss carry-forwards, available for deduction against future taxable income. Non-capital losses expire between 2026 and 2037.

CASH, FUNDS FROM OPERATIONS AND NET INCOME (LOSS)

(thousands of dollars, except per share amounts) Three months ended Six months ended


Cash provided by operating activities $ 2,204 $ 2,709 $ 5,474 $ 4,921

Funds from operations $ 2,064 $ 2,397 $ 4,892 $ 4,591

Per share – basic and diluted $ 0.02 $ 0.03 $ 0.05 $ 0.05

Net income (loss) $ (898) $ (9,441) $ 1,566 $ (7,014)

Per share – basic and diluted $ (0.01) $ (0.11) $ 0.02 $ (0.08)

Cash provided by operating activities for the second quarter of 2017 is 19% lower than the prior period. Funds from operations for the three months ended June 30, 2017 is 14% lower than the comparable period. The lower second quarter cash and funds from operations is primarily due to the higher G&A costs during the second quarter.

Cash provided by operating activities for the six months ended June 30, 2017 is 11% higher than the prior period. Funds from operations for the six months ended June 30, 2017 is 7% higher than the comparable period. The higher second quarter cash and funds from operations is primarily due to improved natural gas prices in 2017 over 2016.

Ikkuma’s net loss for the second quarter of 2017 of $0.9 million ($0.01/share) was lower than the $9.4 million ($0.11/share) reported in the second quarter of last year due primarily to the unrealized loss on financial instruments of $10.8 million recorded in the second quarter of 2016. The Corporation’s net income for the six months ended June 30, 2017 of $1.6 million ($0.02/share) is improved from the $7.0 million loss ($0.08/share) reported last year. The change is due to the $8.0 unrealized gain on financial instruments recorded in 2017 as compared to a $4.3 million unrealized loss on financial instruments along with improved realized natural gas prices in 2017.

CAPITAL EXPENDITURES



Land & Seismic $ 274 $ 93 $ 403 $ 178

Drilling and completions 2,040 460 10,550 3,600

Facilities, equipment and pipelines 70 139 196 27

Other 4 2 8 4

Total exploration and development $ 2,388 $ 694

$ 11,157 $ 3,809

Property acquisition - 2,713

- 2,734

Total capital expenditures $ 2,388 $ 3,407

$ 11,157 $ 6,543

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Total exploration and development expenditures for the six months ended June 30, 2017 of $11.2 million was significantly higher than the $3.8 million recorded in the same period of 2016 due to increased capital activity as commodity prices improved. The focus of the Corporation’s spending in the first half of 2017 was on the Cardium oil play and included drilling two Cardium horizontal oil wells and recompleting a vertical well in a new oil pool. Due to a continuous two well drilling program, Ikkuma achieved a cost reduction of approximately 30% on the drilling of the second Cardium oil well. The Corporation will complete these two Cardium oil wells early in the third quarter.

Total exploration and development expenditures for the three months ended June 30, 2017 of $2.4 million increased compared to the $0.7 million reported in the same period of 2016. During the second quarter, the Corporation completed workovers on its two producing Cardium oil wells to resolve the frack sand production issues that were limiting well run times.

LIQUIDITY AND CAPITAL RESOURCES

CAPITAL STRUCTURE

The Corporation’s objective when managing capital is to maintain a flexible capital structure which will allow it to execute on its capital expenditure program, which includes expenditures on oil and gas activities which may or may not be successful. Therefore, the Corporation monitors the level of risk incurred in its capital expenditures to balance the proportion of debt and equity in its capital structure.

The Corporation considers its capital structure to include working capital, the bank loan, term loan and shareholders’ equity. Ikkuma’s primary capital management objective is to maintain a strong financial position in order to continue the future growth of the Corporation. Ikkuma monitors its capital structure and makes adjustments on an ongoing basis in order to maintain the flexibility needed to achieve the Corporation’s long-term objectives. To manage the capital structure the Corporation may adjust capital spending, hedge future revenue and costs, issue new equity, issue new debt, amend, revise or extend the terms of the existing bank Facility or repay existing debt through non-core asset sales.

CAPITAL FUNDING

On May 25, 2017 Ikkuma entered into a $45 million second lien senior secured term loan facility (the "Term loan") with Alberta Investment Management Corporation (“AIMCo”) that is repayable March 31, 2022 and bears interest at 7.25% per annum. In conjunction with the funding Term Loan, AIMCo received, for no additional consideration, 6,750,000 warrants to acquire common shares on a one for one basis, at an exercise price of $0.86 per share at any time prior to May 25, 2020.

In addition to securing the Term loan, the Corporation also entered into an Amended and Restated Credit Agreement with respect to its existing credit facilities with its banking syndicate whereby the borrowing base was re-determined at $25.0 million and the maturity date was extended to May 31, 2019.

These transactions strengthened Ikkuma’s liquidity as detailed below:

(thousands of dollars) June 30, 2017 December 31, 2016

Committed amount of Bank loan $ 25,000 $ 40,000

Outstanding letters of credit (1,000) (1,000)

Amount that can be drawn after letters of credit 24,000 39,000

Drawn on Bank loan - (25,132)

Current liabilities net of current assets – excluding fair value of financial instruments 5,489 (7,333)

Capacity under the current Bank loan(1) $ 29,489 $ 6,535

(1)Allowable bank debt is subject to a 4:1 adjusted debt to EBITDA covenant restriction

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CONTRACTURAL OBLIGATIONS

Throughout the course of its ongoing business, the Corporation enters into various contractual obligations such as credit agreements, purchase of services, royalty agreements, operating agreements, processing agreements, right of way agreements and lease obligations for office space and field equipment. These obligations reflect market conditions prevailing at the time of contract. Ikkuma believes it has adequate sources of capital to fund all contractual obligations as they come due. The following are the obligations of the Corporation representing future commitments.

(thousands of dollars) Remainder 2017 2018 2019 2020 2021 Thereafter

Operating leases $ 235 $ 126 $ - $ - $ - $ -

Flow-through shares 938 - - - - -

Firm transportation 1,616 4,285 3,100 2,460 2,375 9,648

Total $ 2,789 $ 4,411 $ 3,100 $ 2,460 $ 2,375 $ 9,648

RELATED PARTY TRANSACTIONS

The Corporation did not have any related party transactions in the second quarter.

COMMON SHARE INFORMATION

Six Months Ended

June 30 June 30 2017 2016

Outstanding common shares end of period 94,243,767 94,243,767

Weighted average outstanding common shares

basic and diluted(1) 94,243,767 83,950,882

(1)The Corporation’s stock options and performance warrants are antidilutive

At August 23, 2017, the Corporation had 94,243,767 shares, 6,940,100 stock options ($0.90 average strike price), 3,333,333 million performance warrants ($1.00 strike price) and 6,750,000 warrants ($0.86 strike price) outstanding.

OFF BALANCE SHEET ARRANGEMENTS

The Corporation has certain lease agreements that are entered into in the normal course of operations. All leases are treated as operating leases whereby lease payments are included in operating expenses or general and administrative expenses depending on the nature of the lease. No asset or liability value has been assigned to these leases in the financial statements as of June 30, 2017.

SUBSEQUENT EVENTS

Acquisition

On August 15, 2017, Ikkuma entered into a purchase and sale agreement to acquire assets located in the Alberta Foothills and British Columbia Deep Basin (the “Acquisition”), effective as of July 1, 2017, for cash consideration of $34 million subject to customary adjustments. The Acquisition is subject to standard industry closing conditions, approval by the TSX Venture Exchange (“TSXV”) and the concurrent sale of certain midstream assets by the vendor to a third party purchaser. The Acquisition is expected to close on or about November 1, 2017.

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Infrastructure Disposition

The Corporation has entered into a separate purchase and sale agreement to sell 51% of its trunk line and associated facilities (the “Infrastructure Disposition”) in its existing northern Alberta Foothills properties to an undisclosed buyer, for a total cash consideration of $20 million. The Infrastructure Disposition has an effective date of September 1, 2017 and is expected to close September 15, 2017, but in any event, prior to the closing of the Acquisition.

Equity Issue

The Corporation announced a non-brokered private placement of 12,195,122 flow-through shares at a price of $0.82 per/share for gross proceeds of $10 million (the “Offering”). The Offering will consist of common shares issued on a “flow-through” basis in respect of Canadian exploration expenses under the Income Tax Act (Canada) (the “Flow-Through Shares”). The gross proceeds from the Offering will be used by Ikkuma to incur eligible Canadian exploration expenses (“Qualifying Expenditures”) prior to December 31, 2018. Ikkuma will renounce the Qualifying Expenditures to subscribers of the Flow-Through Shares for the fiscal year ended December 31, 2017.

The completion of the Offering is subject to a number of conditions, including, without limitation, receipt of all regulatory approvals, including approval of the TSXV. Closing of the Offering is expected to occur on or about September 1, 2017. The Flow-through Shares issued pursuant to the Offering will be subject to a statutory hold period of four months plus one day from the closing of the Offering, in accordance with applicable securities legislation.

ADDITIONAL DISCLOSURES

QUARTERLY ANALYSIS

(thousands of dollars, except daily production, average wellhead price and per share amounts)

Q2 2017

Q1 2017

Q4 2016

Q3 2016

Q2 2016

Q1 2016

Q4 2015

Q3 2015

Average daily production (boe/d) 5,861 6,571 5,967 5,866 5,921 7,497 7,270 6,541

Oil and natural gas sales 9,362 10,295 10,669 7,670 4,576 7,896 10,562 11,054

Average wellhead price ($/boe) 17.55 17.41 19.43 14.21 8.49 11.57 15.79 18.37

Exploration and development

expenditures 2,388 8,769 6,949 4,111 694 3,115 4,121 10,434

Property acquisitions (dispositions) - - - 27 2,713 21 (399) (2,968)

Cash provided by operations 2,204 3,270 3,665 519 2,709 2,212 3,685 4,774

Per share – basic and diluted 0.02 0.03 0.04 0.01 0.03 0.03 0.05 0.06

Funds from operations 2,064 2,828 3,216 2,563 2,397 2,194 2,260 2,696

Per share – basic and diluted 0.02 0.03 0.03 0.03 0.03 0.03 0.03 0.03

Net income (loss) (898) 2,464 (8,971) (1,952) (9,441) 2,427 (16,585) (3,662)

Per share – basic and diluted (0.01) 0.03 (0.10) (0.02) (0.11) 0.03 (0.21) (0.05)

Significant factors and trends that have impacted the Corporation’s results during the above periods include:

Q2 2017 average daily production decreased from Q1 2017 due to scheduled turnaround maintenance. Q1 2017 net income of $2.5 million is due to a $6.4 million unrealized gain on risk management commodity

contracts. Q4 2016 net loss of $8.9 million is primarily due to a $6.6 million unrealized loss on risk management commodity

contracts and a $3.2 million impairment expense. Q3 2016 oil and natural gas sales increase as natural gas prices improve in the quarter. Q2 2016 and Q2 2015 exploration and development expenses are lower due to spring breakup.

Q 2 2 0 1 7 M D & A P a g e | 12

Q2 2016 average daily production dropped from Q1 2016 due to shutting-in of uneconomic sour gas production along with downtime in June 2016 for scheduled turnaround maintenance.

Q2 2016 oil and natural gas sales were lower than previous quarters due to lower production volumes and a 30% drop in natural gas realized prices.

Net income reported in Q1 2016 is due to the $6.5 million unrealized gain on risk management commodity contracts and significantly reduced share based compensation expense resulting from the Q4 2015 cancellation of 7.0 million stock options.

Q4 2015 production volumes increased over Q3 2015 as third party production curtailments were slightly reduced, but the Corporation was still unable to produce at full capability.

Average wellhead price in Q4 2015 reflects the significant decrease in natural gas prices during the quarter. Q4 2015 funds from operations and cash provided by operations reflects the impact of reduced natural gas prices

in the fourth quarter. Q4 2015 net loss includes a $7.6 million share based compensation charge for the cancellation of 7.0 million stock

options and a $12.5 million impairment expense. In Q3 2015 Ikkuma tied in two high volume gas wells; however, the Corporation’s daily production was constrained

by third party curtailments.

FUTURE ACCOUNTING PRONOUNCEMENTS

The Corporation has reviewed the following new and revised accounting pronouncements that have been issued but are not yet effective and determined that the following may have an impact on the Corporation’s financial statements:

(a) IFRS-9 Financial Instruments: As of January 1, 2018, the Corporation will be required to adopt IFRS-9 Financial Instruments, which is the result of the first phase of the IASB project to replace IAS-39 Financial Instruments: Recognition and Measurement. The new standard replaces the current multiple classification and measurement models for financial assets and liabilities with a single model that has two classification categories: amortized cost and fair value. In addition, updates have also been applied surrounding hedge accounting requirements which are now more aligned with an entity’s risk management activities. Ikkuma does not currently apply hedge accounting to its financial instrument contracts and does not currently intend to apply hedge accounting to any of its financial instrument contracts upon adoption of IFRS 9.

(b) IFRS-15 Revenue from Contracts with Customers: As of January 1, 2018, the Corporation will be required to adopt IFRS-15 Revenue from Contracts with Customers. The new standard replaces IAS-11 Construction Contracts; IAS-18 Revenue, IFRIC-13 Customer Loyalty Programmes, IFRIC-15 Agreements for the Construction of Real Estate, IFRIC-18 Transfers of Assets from Customers and SIC-31 Revenue-Barter Transactions Involving Advertising Services. The new standard dictates the recognition and measurement requirements for reporting the nature, amount, timing and uncertainty of revenue resulting from an entity’s contracts with customers. Ikkuma is currently in the process of identifying and reviewing underlying revenue contracts with customers to determine the impact, if any, that the adoption of IFRS 15 will have on its financial statements, including enhanced disclosures of disaggregation of revenue.

(c) IFRS-16 Leases: As of January 1, 2019, the Corporation will be required to adopt IFRS-16 Leases. For lessees applying the new standard, a single recognition and measurement model for leases would apply, with required recognition of assets and liabilities for most leases. Ikkuma is still determining the impact that the adoption of this standard will have on its financial statements.

FOR THE SECOND QUARTER ENDING

JUNE 30, 2017

INTERIM

FINANCIAL

STATEMENTS

Q 2 2 0 1 7 I N T E R I M F I N A N C I A L S T A T E M E N T S P a g e | 1

CONDENSED INTERIM STATEMENTS OF FINANCIAL POSITION

(Expressed in thousands of Canadian dollars; unaudited) June 30, December 31, 2017 2016

ASSETS

Current assets

Cash $ 11,074 $ -

Accounts receivable 2,902 5,138

Prepaid expenses and deposits 1,115 1,148

Fair value of financial instruments (Note 10) 2,084 -

17,175 6,286

Non-current assets

Fair value of financial instruments (Note 10) 99 -

Exploration and evaluation assets (Note 3) 5,999 5,745

Petroleum and natural gas properties and equipment (Note 4) 189,970 187,670

Deferred income tax asset 15,824 18,040

Total Assets $ 229,067 $ 217,741

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Accounts payable and accrued liabilities $ 9,602 $ 13,619

Fair value of financial instruments (Note 10) - 3,995

9,602 17,614

Bank loan (Note 5) - 25,132

Term loan (Note 6) 42,918 -

Flow-through share premium liability (Note 8) 92 466

Fair value of financial instruments (Note 10) - 1,863

Decommissioning obligations (Note 7) 45,340 44,364

Shareholders’ equity

Share capital (Note 8) 182,320 182,320

Warrants (Note 8) 3,468 2,325

Contributed surplus 26,885 26,781

Deficit (81,558) (83,124)

131,115 128,302

Commitments (Notes 5 & 11)

Subsequent events (Note 12)

Total Liabilities and Shareholders’ Equity $ 229,067 $ 217,741

The accompanying notes are an integral part of these condensed interim financial statements.


CONDENSED INTERIM STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE

INCOME (LOSS)

(Expressed in thousands of Canadian dollars; unaudited)

Three months ended

June 30, Six months ended

June 30, 2017 2016 2017 2016

Revenues

Petroleum and natural gas sales $ 9,362 $ 4,576 $ 19,657 $ 12,472

Royalties (6) 390 (342) (291)

Realized gain on financial instruments 192 4,392 274 7,478

Unrealized gain (loss) on financial instruments (Note 10) 1,649 (10,832) 8,041 (4,306)

11,197 (1,474) 27,630 15,353

Expenses

Operating 4,460 4,573 9,240 10,033

Transportation 1,085 953 2,265 2,202

General and administrative 1,351 1,104 2,316 2,148

Share-based compensation 62 42 78 81

Depletion & depreciation (Note 4) 4,480 4,171 9,278 9,318

11,438 10,843 23,177 23,782

Income (loss) from operations (241) (12,317) 4,453 (8,429)

Finance expense 956 551 1,465 1,106

Income (loss) before taxes (1,197) (12,868) 2,988 (9,535)

Deferred income tax expenses (benefit) (299) (3,427) 1,422 (2,521)

Net income (loss) and comprehensive income (loss) $ (898) $ (9,441) $ 1,566 $ (7,014)

Net income (loss) per share

Basic and diluted (Note 8) $ (0.01) $ (0.11) $ 0.02 $ (0.08)



CONDENSED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Expressed in thousands of Canadian dollars; unaudited)

Share Capital Warrants

Contributed Surplus Deficit

Total Equity

Balance, January 1, 2016

$ 173,803 $ 2,325 $ 26,574 $ (65,187) $ 137,515

Issue of flow-through common shares, net of premium liability (note 7)

(note 8) 9,014 - - - 9,014

Share issue costs, net of deferred taxes (note 8) (497) - - - (497)

Share-based compensation - - 103 - 103

Loss for the period - - - (7,014) (7,014)

Balance, June 30, 2016

$ 182,320 $ 2,325 $ 26,677 $ (72,201) $ 139,121

Balance, January 1, 2017

$ 182,320 $ 2,325 $ 26,781 $ (83,124) $ 128,302

Share-based compensation (note 9) - - 104 - 104

Warrants, net of tax (note 8) - 1,143 - - 1,143

Income for the period - - - 1,566 1,566

Balance, June 30, 2017

$ 182,320 $ 3,468 $ 26,885 $ (81,558) $ 131,115



CONDENSED INTERIM STATEMENTS OF CASH FLOWS

(Expressed in thousands of Canadian dollars; unaudited) Three months ended June 30,

Six months ended June 30,

2017 2016 2017 2016

Operating activities

Net income (loss) $ (898) $ (9,441) $ 1,566 $ (7,014)

Depletion and depreciation 4,480 4,171 9,278 9,318

Share-based compensation 62 42 78 81

Unrealized loss (gain) on financial instruments (1,649) 10,832 (8,041) 4,306

Accretion on decommissioning obligations 224 220 445 421

Accretion of deferred financing costs 144 - 144 -

Deferred income tax expense (benefit) (299) (3,427) 1,422 (2,521)

Expenditures on decommissioning obligations (19) (112) (118) (152)

Changes in non-cash working capital 159 424 700 482

Cash provided by operating activities 2,204 2,709 5,474 4,921

Financing activities Increase (decrease) in Term loan, net of issue costs 44,337 - 44,337 -

Increase (decrease) in bank debt (29,689) (8,091) (25,132) (6,718)

Issuance of shares, net of issue costs - 9,321 - 9,321

Cash provided by financing activities 14,648 1,230 19,205 2,603

Investing activities

Petroleum, natural gas properties and equipment expenditures (2,168) (668) (10,903) (3,611)

Exploration and evaluation asset expenditures (220) (26) (254) (198)

Petroleum, natural gas properties and equipment acquired, net - (2,713) - (2,734)

Changes in non-cash working capital (3,390) (532) (2,448) (981)

Cash used in investing activities (5,778) (3,939) (13,605) (7,524)

Change in cash and cash equivalents 11,074 - 11,074 -

Cash & cash equivalents, beginning of period - - - -

Cash & cash equivalents, end of period $ 11,074 $ - $ 11,074 $ -



NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS For the three and six months ended June 30, 2017 and 2016 (Expressed in thousands of Canadian dollars except per share amounts; unaudited)

1. REPORTING ENTITY

Ikkuma Resources Corp. (the “Corporation” or “Ikkuma”) is an oil and gas exploration and production Corporation with

producing properties in the foothills of Alberta and British Columbia. The Corporation is headquartered in Calgary and is an

Alberta-based reporting entity whose shares are listed on the TSX Venture Exchange under the symbol: IKM.V. The

registered office and principal address is located at 2700, 605 – 5th Avenue S.W. Calgary, AB, T2P 3H5.

2. BASIS OF PRESENTATION

These condensed interim financial statements have been prepared in accordance with International Accounting Standard

(“IAS”) 34 – Interim Financial Reporting using accounting policies consistent with the International Financial Reporting

Standards (“IFRS”) and have been prepared following the same accounting policies and methods of computation in the

Corporation’s annual financial statement for the year ended December 31, 2016, except for as stated below. The condensed

interim financial statements do not include certain disclosures that are required to be included in annual financial statements

and they should be read in conjunction with the annual financial statements for the year ended December 31, 2016.

These condensed interim financial statements were authorized for issuance by Ikkuma’s Board of Directors on August 23,

2017.

Certain comparative numbers have been reclassified to conform to current presentation.

3. EXPLORATION AND EVALUATION ASSETS

(thousands of dollars)

At January 1, 2016 $ 8,026

Additions 681

Transfers to petroleum and natural gas properties and equipment (2,962)

At December 31, 2016 $ 5,745

Additions 254

At June 30, 2017 $ 5,999

NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS


4. PETROLEUM AND NATURAL GAS PROPERTIES AND EQUIPMENT

Cost (thousands of dollars)

At January 1, 2016 $ 212,415

Additions 14,236

Acquisitions 4,961

Transfers from exploration and evaluation assets 2,962

Change in decommissioning obligations 1,217

At December 31, 2016 $ 235,791

Additions 10,929

Change in decommissioning obligations 649

At June 30, 2017

$ 247,369

Accumulated Depletion & Depreciation (thousands of dollars)

At January 1, 2016 $ 27,018

Depletion and depreciation 17,953

Impairment 3,150

At December 31, 2016 $ 48,121

Depletion and depreciation 9,278

At June 30, 2017

$ 57,399

Net Book Value (thousands of dollars)

At December 31, 2016 $ 187,670

At June 30, 2017 $ 189,970

Depletion

At June 30, 2017, future development costs of Ikkuma’s proved plus probable reserves of $39.6 million were included in the

depletion calculations (December 31, 2016: $39.6 million). Residual value of $14.4 million (December 31, 2016: $14.4

million) and $7.3 million of work-in-progress drilling and completion expenditures were excluded from the depletion

calculations.

At June 30, 2017, it was determined that no impairment indicators existed on the Corporation’s CGUs and therefore no

impairment tests were performed.



5. BANK LOAN

As at June 30, 2017 the Corporation’s credit facility with a syndicate of Canadian banks consisted of a revolving line of credit

of $10 million and an operating line of credit of $15 million collectively, (the “Facility”or “Bank loan”). The Facility revolves

for a 364 day period and will be subject to its next 364 day extension by May 31, 2018. If not extended, the Facility will cease

to revolve, the margins thereunder will increase by 0.5 percent and all outstanding advances thereunder will become

repayable in one year from the extension date. The available lending limits are reviewed semi-annually and are based on

the bank syndicate’s interpretation of the Corporation’s reserves and future commodity prices. The Facility is secured by a

floating charge debenture and a general security agreement on the assets of the Corporation. There can be no assurance

that the amount of the available Facility will not be adjusted at the next scheduled borrowing base review on or before

November 30, 2017.

Advances under the Facility are available by way of prime rate loans with interest rates between 1.0 percent and 3.0 percent

over the bank’s prime lending rate and bankers’ acceptances and LIBOR loans, which are subject to stamping fees and

margins ranging from 2.0 percent to 4.0 percent. Standby fees are charged on the undrawn Facility at rates ranging from 0.5

percent to 1.0 percent. The applicable rate is dependent upon the adjusted debt to EBITDA ratio, as defined in the credit

agreement. EBITDA is comprised of earnings before interest, taxes, depreciation and amortization and adjustments for other

non-cash items. EBITDA used in the ratio is based on the Corporation’s last four quarters completed. Adjusted debt is the

outstanding amounts of the Term Loan and Bank Loan, plus outstanding letters of credit, less unrestricted cash. The

Corporation is subject to a quarterly financial covenant that the Corporation’s adjusted debt to EBITDA ratio for each quarter

end is not to exceed 4.0 to 1. As at June 30, 2017, the Corporation is in compliance with all Facility covenants.

As at June 30, 2017 the Corporation’s debt to EBITDA ratio is 2.8 to 1 (December 31, 2016 – 2.2 to 1). Accordingly, applicable

pricing will be a 2.0 percent margin on prime lending and a 3.0 percent stamping fee and margin on bankers’ acceptances

and LIBOR loans along with a 0.75 percent per annum standby fee on the portion of the facility that is not drawn. Borrowing

margins and fees are reviewed annually as part of the bank syndicate’s annual renewal. At June 30, 2017, the Corporation

had outstanding letters of credit totaling $1.0 million (December 31, 2016 - $1.0 million) that reduce the amount otherwise

drawn on the Facility. The effective interest rate on the Corporation’s borrowings under its bank Facility for the six month’s

ended June 30, 2017 was 4.1% (June 30, 2016 – 4.7%).

6. TERM LOAN

On May 25, 2017, Ikkuma entered into a second lien senior secured term loan facility (the “Term loan”) which included

the issuance of 6.8 million warrants to purchase common shares (note 8). The Term loan matures on March 31, 2022

and bears interest at 7.25% per annum with semi-annual interest payments due June 30 and December 31 of each year.

The Term loan contains certain restrictions that limit the Corporation’s ability to incur additional indebtedness, make

restricted payments and dispose of certain assets. Amounts borrowed under the Term loan that are repaid or prepaid

are not available for re-borrowing. The Corporation may not prepay the Term loan prior to the second anniversary

thereof, except with payment of a make whole premium.

The Term loan is secured by a general security agreement over all present and future property of the Corporation,

subordinate only to liens securing loans under the Corporation’s Facility with its syndicate of Canadian banks. The Term

loan is subject to the same covenants as the Facility with Canadian banks. As at June 30, 2017, the Corporation is in

compliance with all Term loan covenants.


As at June 30, 2017

Balance, beginning of period $ -

Principal amount of Term loan issued 45,000

Deferred financing costs (2,226)

Accretion of deferred financing costs 144

Balance, end of period

$ 42,918



Deferred financing costs related to the Term loan have been presented net against the debt obligation and will be

accreted such that the debt balance equals the principal of $45.0 million at maturity. Deferred financing costs are

comprised of debt issue costs of $0.6 million and the fair value of the warrants issued to AIMCo of $1.6 million.

7. DECOMMISSIONING OBLIGATIONS

Decommissioning Obligations

(thousands of dollars) Six Months Ended

June 30, 2017 Year ended

December 31, 2016

Decommissioning obligations, beginning of period $ 44,364 $ 40,393

Obligations incurred 349 496

Obligations acquired - 2,200

Change in estimated future cash outflows 300 (911)

Change in discount rate on acquisition - 1,633

Obligations settled (118) (314)

Accretion expense 445 867

Decommissioning obligations, end of period $

45,340

$ 44,364

The Corporation’s decommissioning obligations result from net ownership interests in petroleum and natural gas assets

including well sites, gathering systems and processing facilities. The Corporation estimates the total undiscounted amount

of cash flows required to settle its decommissioning obligations is approximately $61 million (December 31, 2016 - $60

million). These payments are expected to be made over the next 50 years with the majority of costs to be incurred between

2039 and 2049. A risk free rate of 2.0% (December 31, 2016 – 2.0%) and an inflation rate of 2.0% (December 31, 2016 –

2.0%) was used to calculate the fair value of the decommissioning obligations.

8. SHARE CAPITAL

(thousands of dollars except share amounts) Six Months Ended June 30, 2017

Year Ended December 31, 2016

Common Shares Amount

Common Shares Amount

Balance beginning of the period 94,243,766 $ 182,320 80,158,766 $ 173,803

Issuance of flow-through common shares - - 14,085,000 10,000

Flow-through share premium - - - (986)

Share issue costs - - - (679)

Deferred taxes on share issue costs - - - 182

Balance end of the period 94,243,766 $ 182,320 94,243,766 $ 182,320



On May 12, 2016, the Corporation completed a bought deal private placement, led by a syndicate of underwriters, of

14.1 million flow-through shares at a price of $0.71 per flow-through share, resulting in gross proceeds of $10 million.

The implied premium on the flow-through shares was determined to be $1.0 million or $0.07 per flow-through share,

assuming a market price of $0.64 per ordinary common share. Pursuant to the provisions of the Income Tax Act

(Canada), the Corporation is committed to incur eligible Canadian exploration expenses after the closing date and prior

to December 31, 2017 in the aggregate amount of not less than the total gross proceeds raised from the offering.

Ikkuma renounced the Qualifying Expenditures of $10 million on December 31, 2016.

Warrants

The Corporation issued 6,750,000 warrants valued at $1.6 million in connection with the Term loan (note 6). Each warrant

entitles the holder to acquire common shares on a one for one basis at an exercise price of $0.86 per share prior to May 25,

2020. These warrants were assigned a value of $1.6 million based on a discounted cash flow analysis in determination of the

fair value of the Term loan using an estimated market interest rate.

In addition the Corporation has 3,333,333 vested performance warrants that entitle the holder to acquire common shares

on a one for one basis at an exercise price of $1.00 per share prior to May 22, 2019.

Per Share Amounts

Per share amounts have been calculated on the weighted average number of shares outstanding. The weighted average

shares outstanding for the three months ended June 30, 2017 was 94,243,766 (June 30, 2016 – 87,742,998). The weighted

average shares outstanding for the six months ended June 30, 2017 was 94,243,766 (June 30, 2016 – 83,950,882).

The diluted income per share calculation for the six months ended June 30, 2017 is not affected by either the outstanding

stock options or warrants as they are anti-dilutive.

9. STOCK OPTIONS

The Corporation has a stock option plan for directors, employees and service providers. Stock options granted under the

stock option plan have a term of 5 years to expiry. One third of the options granted vest on each of the first, second and

third anniversaries of the date of grant. At June 30, 2017 the Corporation had 6,940,100 options outstanding with a weighted

average exercise price of $0.90.

The following tables summarize the information about the stock options:

Six Months Ended June 30, 2017


Options

Weighted Avg Exercise Price Options

Weighted Avg Exercise Price

Outstanding beginning of the period 840,600 $ 1.18 843,100 $ 1.18

Granted 6,159,500 0.86 - -

Forfeited (60,000) (1.19) (2,500) (1.19)

Outstanding end of the period 6,940,100 $ 0.90 840,600 $ 1.18

The weighted average trading price of the Corporation’s common shares was $0.65 during the three months ended

June 30, 2017 (June 30, 2016 – $0.64) and $0.75 for the six months ended June 30, 2017 (June 30, 2016 - $0.62).



The following table summarizes stock options outstanding and exercisable at June 30, 2017:

Options Outstanding

Options Exercisable

Exercise Price per Share

Number of Options

Weighted Avg Exercise Price

Weighted Avg Remaining Life

(years) Number of

Options Weighted Avg Exercise Price

Weighted Avg Remaining Life

(years)

$ 0.66 10,000 $ 0.66 2.60 6,667 $ 0.66 2.60

$ 0.86 6,159,500 $ 0.86 4.94 - $ - -

$ 1.19 770,600 $ 1.19 2.46 513,733 $ 1.19 2.46

6,940,100 $ 0.90 4.66 520,400 $ 1.18 2.47

The fair value of the options granted was estimated using the Black-Scholes option-pricing model with the following

weighted average assumptions.

Six Months Ended June 30, 2017


Assumptions

Risk free interest rate (%) 0.94 n/a

Option life (years) 5.00 n/a

Forfeiture rate (%) 5.00 n/a

Volatility (%) 80.00 n/a

Results

Weighted average fair value of each share option granted $ 0.34 $ n/a

The following summarizes the Corporation’s share-based compensation:


June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016

Gross costs $ 83 $ 52 $ 104 $ 103


Total share-based compensation $ 62 $ 42 $ 78 $ 81

10. FINANCIAL RISK MANAGEMENT

It is the Corporation’s policy to economically hedge some oil and natural gas sales through the use of various financial

forward sales risk management contracts. The Corporation does not apply hedge accounting for these contracts. The

Corporation’s production is sold using “spot” or near term contracts, with prices fixed at the time of transfer of custody or

on the basis of a monthly average market price. Ikkuma does not enter into commodity contracts other than to meet the

Corporation’s expected sales requirements.

The fair value of options and costless collars is based on option models that use published information with respect to

volatility, prices and interest rates. These instruments are considered level two under the fair value hierarchy. The fair value

of forward contracts and swaps is determined by discounting the difference between the contracted prices and published

forward price curves as at the date of the statement of financial position, using the remaining contracted oil and natural gas

volumes and a risk-free interest rate (based on published government rates).



At June 30, 2017 the Corporation held risk management commodity contracts as follows:

Natural Gas (AECO $Cdn)

Remaining Term Option Traded Volume (GJ/d) Strike Price Fair Value ($000)



July 1, 2017 - December 31, 2017 Swap - buy 7,000 $3.00 $ (836)



July 1, 2017 - December 31, 2017 Swap – sell 2,500 $2.70 $ 137


January 1, 2018 - December 31, 2018 Swap - sell 5,500 $2.72 $ 572

January 1, 2018 - December 31, 2018 Swap - Sell(1) 2,500 $2.80 $ 200



Total $ 2,183

(1) This contract has a European option whereby if the price on settlement each month exceeds $2.80/GJ the contract

double to 5,000 GJ @ $2.80.

At June 30, 2017, a 10% decrease to the natural gas price outlined in the contracts above would result in an approximate

$1.7 million increase in net income (June 30, 2016 – $0.1 million).

Capital Management

The Corporation’s objective when managing capital is to maintain a flexible capital structure which will allow it to execute

on its capital expenditure program, which includes expenditures on oil and gas activities which may or may not be successful.

Therefore, the Corporation monitors the level of risk incurred in its capital expenditures to balance the proportion of debt

and equity in its capital structure.

The Corporation considers its capital structure to include working capital, the Bank loan, Term loan and shareholders’ equity.

Ikkuma’s primary capital management objective is to maintain a strong financial position in order to continue the future

growth of the Corporation. Ikkuma monitors its capital structure and makes adjustments on an ongoing basis in order to

maintain the flexibility needed to achieve the Corporation’s long-term objectives. To manage the capital structure the

Corporation may adjust capital spending, hedge future revenue and costs, issue new equity, issue new debt, amend, revise

or extend the terms of the existing bank Facility or repay existing debt through non-core asset sales.

During the second quarter of 2017, the Corporation entered into a $45 million second lien secured term loan facility that

strengthened Ikkuma’s liquidity as detailed below:


June 30, 2017 December 31, 2016

Committed amount of Bank loan (note 5) $ 25,000 $ 40,000

Outstanding letters of credit (1,000) (1,000)

Amount that can be drawn after letters of credit 24,000 39,000

Drawn on Bank loan - (25,132)

Current liabilities net of current assets – excluding fair value of financial instruments 5,489

(7,333)

Capacity under the current Bank loan(1) $

29,489

$ 6,535

(1)Allowable bank debt is subject to a 4:1 adjusted debt to EBITDA covenant restriction



11. COMMITMENTS

(thousands of dollars) Remainder 2017 2018 2019 2020 2021 Thereafter

Operating Leases $ 235 $ 126 $ - $ - $ - $ -

Flow-through shares 938 - - - - -

Firm transportation 1,616 4,285 3,100 2,460 2,375 9,648

Total $ 2,789 $ 4,411 $ 3,100 $ 2,460 $ 2,375 $ 9,648

On May 12, 2016, the Corporation issued 14.1 million flow-through shares at a price of $0.71 per flow-through share.

Pursuant to the provisions in the Income Tax Act (Canada), the Corporation shall incur Canadian exploration expenses

(“Qualifying Expenditures”) after May 12, 2016 and prior to December 31, 2017 in the aggregate amount of not less

than $10 million. At June 30, 2017, the Corporation had incurred $9.1 million of Qualifying Expenditures.

12. SUBSEQUENT EVENTS

Acquisition

On August 15, 2017, Ikkuma entered into a purchase and sale agreement to acquire assets located in the Alberta

Foothills and British Columbia Deep Basin (the “Acquisition”), effective as of July 1, 2017, for cash consideration of $34

million subject to customary adjustments. The Acquisition is subject to standard industry closing conditions, approval

by the TSX Venture Exchange (“TSXV”) and the concurrent sale of certain midstream assets by the vendor to a third

party purchaser. The Acquisition is expected to close on or about November 1, 2017.

Infrastructure Disposition

The Corporation has entered into a separate purchase and sale agreement to sell 51% of its trunk line and associated

facilities (the “Infrastructure Disposition”) in its existing northern Alberta Foothills properties to an undisclosed buyer,

for a total cash consideration of $20 million. The Infrastructure Disposition has an effective date of September 1, 2017

and is expected to close September 15, 2017, but in any event, prior to the closing of the Acquisition.

Equity Issue

The Corporation announced a non-brokered private placement of 12,195,122 flow-through shares at a price of $0.82

per/share for gross proceeds of $10 million (the “Offering”). The Offering will consist of common shares issued on a

“flow-through” basis in respect of Canadian exploration expenses under the Income Tax Act (Canada) (the “Flow-

Through Shares”). The gross proceeds from the Offering will be used by Ikkuma to incur eligible Canadian exploration

expenses (“Qualifying Expenditures”) prior to December 31, 2018. Ikkuma will renounce the Qualifying Expenditures

to subscribers of the Flow-Through Shares for the fiscal year ended December 31, 2017.

The completion of the Offering is subject to a number of conditions, including, without limitation, receipt of all

regulatory approvals, including approval of the TSXV. Closing of the Offering is expected to occur on or about

September 1, 2017. The Flow-through Shares issued pursuant to the Offering will be subject to a statutory hold period

of four months plus one day from the closing of the Offering, in accordance with applicable securities legislation.

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